The importance of loan-level data for ABS investors

Large amounts of aggregation and the absence of loan-level data have traditionally made determining the true value of assets in the ABS market difficult. S&P recently held an event at the London Stock Exchange ("Gearing up for European loan-level data") and chaired a round-table session with other market participants to discuss the impact that the provision of loan-level data may have for investors.

David Pagliaro: Good afternoon gentlemen and welcome to the London Stock Exchange for a roundtable discussion hosted by Standard & Poor's on the subject of the provision of loan-level data in the ABS market -focusing on the need for it, its availability and finally, the impact that it may have on investment decisions.

To start us off - who do you see as the key players driving the introduction of loan-level data into the market?

Gordon Kerr: There are three major groups driving this. First, investors are requesting loan-level data to better understand the true nature of the ABS instruments on offer and hence make better investment decisions. Then there are the regulators, which are pursuing increased transparency in the market. And finally, the banks are keen to find out what is held on trading records for risk management purposes.

DP: It seems that the provision of loan-level data to these parties may be aided by the European Central Bank and the Bank of England - both of which have already suggested that they are going to compel originators to make loan-level data widely available.

But, in terms of the European ABS market, why is loan-level data so important? Indeed, the widespread availability of loan-level data and analytical tools did not shelter the US from the effects of the financial crisis.

Craig Tipping: There is interest in European ABS products from foreign investors, especially in the US, who are keen to broaden their investment mandates. But they are also understandably nervous about dipping into European markets post-crisis.

In our experience, the ability to have loan-level data increases their comfort in dealing with Europe, however. For them it is almost a black box of investment information - as you have said, something that they are used to in the US and which they welcome in Europe.

Sriram Soundararajan: It is important to remember that loan-level data was very useful in the US during the financial crisis, providing great insight into what was transpiring. And even post-crisis - when modifications became so widespread that it was really difficult to buy bonds in the US - loan-level data was absolutely critical in figuring out where the modifications were likely to be directed and what was going to happen to bonds.

GK: Going forward, loan-level data also allows greater differentiation. A lot of investors are reticent to consider investment in Spain, for example, because of the economic issues facing the country as a whole. But if they were to look deeper into a lot of the deals on a loan-level basis, many investors could become more comfortable and willing to invest in certain sectors of the market.

DP: Standardisation can also help elevate this level of comfort. One of the key market concerns is about consistency of data and consistency of requirements. There may be one in four organisations that want information in a different format, but our aim is for everyone to base their work on the same template.

Now, looking at this from an investor or trader perspective, what capabilities do investors need to be able to extract the value out of loan-level data?

SS: Investors need to be able to handle a lot of information on a regular basis, from calculating benchmarks to building collateral models. Certainly, analysis is not predictive enough unless investors have a full collateral model available.

This is one of the key problems in Europe compared to the US - investors still tend to rely on personal judgement rather than strong analytics when making investment decisions. As such, European investors need to ramp-up their analytics capabilities to be able to realise the benefits provided by loan-level data.

I imagine that we will start to see companies offering analytical tools to investors and some companies, like S&P, offering integrated data and analytics that investors can buy and use. It's very common to see pre-payment and default models offered in the US. This is the next phase in Europe.

CT: Loan-level data is very specific to individual sectors. In European prime RMBS, for example, the availability of loan-level data will probably not have that big an impact.

But in a CMBS deal there is a far greater need for it. Here, there already is a detailed amount of information which most of the traders use and it is very useful in their niche market.

DP: Is there a flip-side to this from an investor perspective? Does the requirement for these capabilities create a barrier to entry or is it an opportunity for them?

GK: I see it as an opportunity. Going forward, organisations will build their own analytic models, buy from providers and borrow from larger research houses like ourselves.

So, not only is there a big opportunity for organisations with investing teams which are very good at doing detailed, high-level analysis. There is also a great opportunity for the organisations that can provide the tools and the framework for people to make their own sound judgements.

DP: Loan-level data is clearly advantageous for credit analysis, but what are the other benefits?

SS: Credit is one side, but there are definitely other angles. For instance, the way prices are in the secondary market, pre-payment risk is a very big deal now. Being able to forecast this risk more confidently by using a model could be critical.

GK: The ability to run real-time scenario analysis on loan-level data across different sectors will be a clear boon for investors. This will allow them to stress-test the effect of different events and look at the outcomes and potential benefit or loss on an investment.

CT: The provision of loan-level data will provide some key benefits, but it is not going to level the playing field for investors. In fact, it could make it more complicated - only the large investors will be able to afford the systems and personnel required to analyse the data. As such, the playing field will become biased in favour of the more sophisticated investor.

Question from the audience: Do you see the provision of loan-level data being widespread in the near future or will this take some time?

GK: This is where we can offer a real voice to move things forward. New issuers are not exactly putting it out there hand-over-fist, so it is up to investors to demand more detailed information when buying a deal.

DP: The initiatives of the ECB and BoE will support widespread availability of this type of data soon. Certainly, at S&P we are committed, through the use of ABSXchange, to bringing together the buy and sell sides in terms of transparency of information and analytics employed. Everything is moving towards greater transparency, more robust data sets and broader analytic capabilities and that is what we are working on.